“Europe’s CLO market in danger of extinction” warned a headline in the Financial Times in December 2011. There were only a handful of new collateralised loan obligations (CLOs) issued between 2009 and 2012 because banks were reluctant to support the market and the turmoil in the eurozone was deterring investors. While the European CLO market is still a long way off its peak in 2007 it’s no longer on the endangered list.
In 2014, CLO issuance in Europe reached €14.29 billion, which was double the issuance of the previous year1. BNY Mellon acted as either paying agent or trustee on more than a quarter of the 34 CLOs that were issued in the region last year2. European CLO issuance this year is expected to total between €20 billion and €25 billion, according to Euromoney3.
In February this year, Commerzbank closed Bosphorus CLO I Limited which was managed by the bank’s Debt Fund Management division. The €233.4 million CLO, which BNY Mellon was appointed trustee and principal paying agent for, securitised a portfolio of senior secured loans and bonds granted to European companies.
This deal is significant for a couple of reasons. It marked the first European CLO for both Commerzbank and Sterne, Agee & Leach, Inc. which is acting as arranger. Secondly, the deal was the first static CLO in Europe since the financial crisis; so there is no reinvestment or discretionary trading permitted in the CLO after the deal closes. “This deal demonstrates our continued partnership with clients on more innovative solutions,” said Dean Fletcher, Head of Corporate Trust EMEA at BNY Mellon. “The static structure provides investors with an alternative to actively managed vehicles by offering a combination of yield, asset quality and reduced management costs. The tight spread reflects investors’ enthusiasm for the offering. The senior tranche of Bosphorus CLO I Limited is priced at 115 basis points above Euro Interbank Offered Rate, which is one of the tightest spreads in the European CLO market."
“Over the last year we have seen a recovery in the market,” adds Fletcher. “In the current low interest rate environment investors are attracted by the higher yields that CLOs offer compared to other corporate debt. We are also seeing a diverse range of investors with more insurers and pension funds coming into the market. The market has been traditionally dominated by banks which in recent years have curtailed their lending.”
The European Central Bank and others have suggested that securitisation offers insurers and pension funds an opportunity to help support lending to businesses across Europe4. The CLO market is not the panacea to plug the corporate funding gap but along with other sources, such as the corporate bond and equity markets, securitisation can provide additional funding to support the economic recovery in Europe.